Why You Ought to Be Skeptical of NAFTA 2.0

Diana Ransom is features editor at Inc. She has been covering the never-dull world of small business and entrepreneurship for years at a variety of publications, including The Wall Street Journal, SmartMoney.com, the New York Daily News, Fast Company, and Entrepreneur. She lives in Brooklyn, New York.

Twenty years after the North America Free Trade Agreement went into effect, the President is now itching to revamp it--promising to reduce travel barriers and business hurdles. But a look behind the talking points shows a deeply flawed trade pact that's hurt as much as it's helped U.S. small businesses.

At the North American Leaders Summit held in Toluca, Mexico, Wednesday President Obama met with leaders from Mexico and Canada to discuss ways the triumvirate can improve upon the longstanding agreement that reduces tariffs and other trade barriers between the countries.

Among other things, the latest discussion involved creating a so-called North American Trusted Traveler Program, which would ease travel between the three countries for certain vetted individuals. The talks also touched on improving communications and sharing trade data to make doing business easier.

"Together, our countries have strengths that give North America a tremendous competitive advantage--the skills of our workers, manufacturing that's growing, and new sources of energy," President Obama said at a press conference yesterday. "All of this positions us to be a powerhouse in the global economy."

The Pros and Cons

On its surface, the two-decade-old program is an unequivocal success. Just take a gander at the 2012 report from the Commerce Department, which presented NAFTA's accolades in honor of the 20th anniversary of the agreement's signing.

Yesterday, U.S. Secretary of Commerce Penny Pritzker, who joined the President in Mexico, added some updates:

"The United States and Canada share the world's largest bilateral trading relationship, with more than $700 billion in two-way trade in goods and services annually and more than $600 billion in direct investment on both sides of the border. Mexico is the United States' second-largest export market and third-largest trading partner, and bilateral trade between the United States and Mexico was almost half a trillion dollars in 2012."

These stats may all be true. And globalization certainly has its benefits for U.S. companies--chiefly lower labor costs and greater market access. But the reality is many small businesses haven't benefited from the agreement.

"Due to the majority of USA garment manufacturers heading overseas since NAFTA, the supply chain of making certain aspects in clothing has been broken," says Boomer Beam, a spokesman for the All American Clothing Co., a jeans maker in Arcanum, Ohio. "It is now much harder to find a supplier of USA-made buttons, zippers, fabrics, and such than it has ever been before."

Beyond finding suppliers, it's also well known that just 1 percent of small companies engage in exporting. And while free trade agreements are intended to prop up U.S. manufacturing businesses and create jobs, many companies have shuttered as lower-cost competitors have taken market share and many U.S. jobs have shifted overseas.

Nearly 4 million U.S. jobs have been lost since NAFTA took effect and since China entered the World Trade Organization in 2001, according to Robert E. Scott, director of trade and manufacturing policy research at the Economic Policy Institute, a nonpartisan think tank in Washington, D.C.

Free Trade Expansion

Still, the President has called for reinforcing NAFTA, as well as the authority to "fast track" two massive trade proposals through Congress: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The TPP would reduce trade barriers and establish standards between the U.S. and 11 other nations near the Pacific Rim, while the TTIP would enact similar measures between the European Union and the United States.

Congressional Democrats including Senator Harry Reid of Nevada and Representative Nancy Pelosi of California have voiced opposition to granting the President's request to quicken the negotiations process. The TPP is highly contentious, as it would foster greater trade with countries such as Malaysia and Vietnam, which can pay workers an hourly wage of less than 50 cents.

"The TPP literally replicates and expands on the same model as NAFTA," says Lori Wallach, a trade expert at Public Citizen, a liberal-leaning advocacy group. Both agreements involve many of the same benefits and limitations, and differ only in certain categories like environmental standards, she adds. "Obama is only doubling down on the same rules that caused the problem and spreading it out."

It's too soon to know exactly how the various trade talks will play out. In terms of which businesses will benefit (and which would suffer), it's not entirely clear--and may depend largely on who you ask. Tangela Walker-Craft, the founder of the children's products maker Simply Necessary in Lakeland, Florida, has already made up her mind on the matter:

"Having NAFTA in place has been a help to my small business. I can sell and ship my product to Canada without the hassle of customs clearance," says Walker-Craft. "I just lost out on a sale to Denmark because I'm not set up to sell internationally."